A branch plant for bombs

Canada’s February 2026 Defence Industrial Strategy (DIS) frames defence production as central to Canadian security. It emerges amid U.S. pressure on NATO allies to increase military spending, and responds to growing doubts about American reliability as a security partner.

Alongside multi-billion-dollar investments in the Canadian defence industry, the strategy seeks to diversify arms sales away from the U.S. while pushing for a 50 per cent increase in Canadian arms exports overall.

Yet, given the deep integration of the North American defence industrial base and increasingly inward-looking global markets, the DIS will likely accelerate arms sales southbound while further entrenching reliance on the U.S. market, raising questions about strategic autonomy and downstream human rights risks.

Defence Industrial Strategy

To date, analysis of the DIS has focused on its objective to diversify military procurement away from the United States. Approximately 70 per cent of Canadian Armed Forces kit is sourced from U.S. suppliers, and the DIS aims to enable Canadian manufacturers to capture a greater share of domestic contracts.

The strategy also seeks to diversify Canadian arms exports away from contracts with the U.S. Department of War.

Most of Canada’s arms exports are towards the United States. The Canadian Association of Defence and Security Industries (CADSI), which represents the Canadian defence industry, estimates these exports have been worth $4 billion in recent years. Approximately two-thirds of Canadian arms transfers in peak years are for the U.S. government.

This is not new. Historically, Canada’s defence industry has been part of a broader North American defence industrial base. With some notable exceptions, in terms of volume, most of the military technologies that Canada exports are components for American-made systems, from the M1 Abrams main battle tank to the F-35 Joint Strike Fighter to 155 mm artillery shells.

The federal government has institutionally supported this integration for decades. The Canadian Commercial Corporation, for example, brokers and facilitates contracting with the U.S. for Canadian defence sales exceeding US$350,000. The relationship is further entrenched by corporate ownership, with half of Canada’s 10 largest defence firms being subsidiaries of U.S. companies whose production decisions are shaped by American strategic and commercial priorities.

Given strains in the U.S.-Canada relationship, the federal government has interpreted this dependence as a liability. A defence industry so enmeshed with a single partner leaves Canada with limited room to manoeuvre if that partnership deteriorates. The DIS seeks to diversify export partners and strengthen Canadian military production. Whether diversification is achievable, however, depends on the availability of credible alternative markets.

Moving toward Europe

The strategy prioritizes strengthening defence-industrial relationships with allies, particularly the European Union, including through the establishment of a defence partnership to secure Canada’s participation in Security Action for Europe (SAFE).

Adopted in 2025, SAFE is a financial instrument designed to expand Europe’s integrated defence industrial base under the broader Readiness 2030 initiative. Under SAFE, the European Commission will raise up to €150 billion and disburse those funds to member states as long-term loans for joint defence procurement and industrial investment.

According to Global Affairs Canada, European states already accounted for 31.5 per cent of all non-U.S. arms exports, or $789.4 million, in 2024. That Europe is already one of Canada’s most significant alternative markets makes the structural barriers to expanding sales there all the more consequential.

The limits of diversification

Despite the emphasis on European defence agreements and funding for export promotion, the DIS has yet to provide a path to diversification, given current economic and industrial constraints.

The European market, one of the most obvious destinations for Canadian military goods outside the U.S., is not an open one. The same conversations taking place in Ottawa about strategic autonomy and defence production are occurring across European capitals, and Canada’s participation in SAFE or other instruments does not guarantee a corresponding increase in arms transfers.

As per Canada’s negotiations to join SAFE, Canadian firms bidding on SAFE-funded procurement contracts may supply up to 80 per cent Canadian content under each agreement, meaning that at least 20 per cent of component value must originate in SAFE member states. While this has been lauded as a win for Canadian industry, as the cap for other countries outside of SAFE remains at 35 per cent, it poses a significant challenge for Canada, whose defence production consists overwhelmingly of components destined for American systems rather than complete weapon systems drawing on foreign-sourced parts. Canadian firms are, by and large, producers of components, not assemblers of them.

Further complicating matters is the requirement that Canadian firms must not be controlled by third countries to win SAFE procurement bids.

For U.S.-owned subsidiaries that make up half of Canada’s largest defence firms, this creates a grey area. Participation in SAFE-funded contracts is possible, but contingent on obtaining national security waivers from EU member states on a case-by-case basis. These hurdles are likely to deter many firms from pursuing SAFE contracts when alternatives—namely subcontracts on major U.S. military programs—do not impose the same regulatory burden.

The path of least resistance

Under these conditions, the strategy’s target of a 50 per cent increase in Canadian arms sales is more likely to reinforce existing trade patterns than forge new ones. The integration of the North American defence industrial base, combined with barriers to international markets, keeps the path of least resistance pointing south. Similar dynamics exist in other target markets, for example, Japan and the Republic of Korea, which have also prioritized domestic production and export in pursuit of strategic autonomy.

This matters for two reasons:

First, the DIS seeks to diversify Canadian defence relationships, interpreting current overdependence on the U.S. market as a security concern. Given that existing dynamics will likely deepen reliance on the U.S., particularly given a projected 50 per cent increase in arms exports, this should raise concerns for Canadian sovereignty and security. In effect, the DIS may produce the opposite of its intended outcome.

Second, increasing arms transfers to the U.S. Department of War carry demonstrable downstream human rights risks in light of an increasingly belligerent U.S. foreign policy. Canadian military goods are already being used in U.S. airstrike operations in the Caribbean that legal monitors describe as extrajudicial killings. Moreover, the U.S. acts as a conduit through which Canadian technologies are transferred to countries with poor human rights records, including Israel.

The projected increase in defence production and export, with the U.S. as the likely primary market, exposes Canada to potential complicity in serious violations of international law. These risks are not hypothetical, and Canada’s binding obligations to prevent problematic arms transfers are unambiguous. The DIS is likely to reinforce dependency on the U.S., whose reliability can no longer be assumed. More broadly, the assumption that increased arms exports will necessarily enhance Canadian resilience and security warrants serious scrutiny.